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Trafalgar v. Aetna Life Insurance Company; Algonquin Power Corporation

April 3, 2012

TRAFALGAR POWER INC. AND CHRISTINE FALLS CORPORATION, PLAINTIFFS,
v.
AETNA LIFE INSURANCE COMPANY; ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER INCOME FUND; AND ALGONQUIN POWER FUND (CANADA) INC.; DEFENDANTS. ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER INCOME FUND; AND FRANKLIN INDUSTRIAL COMPLEX, INC.; PLAINTIFFS,
v.
TRAFALGAR POWER, INC.; CHRISTINE FALLS CORPORATION; AND PINE RUN OF VIRGINIA, INC.; DEFENDANTS. IN RE: MARINA DEVELOPMENT, INC.; FRANKLIN INDUSTRIAL COMPLEX, INC.; CHRISTINE FALLS OF NEW YORK, INC.; TRAFALGAR POWER, INC.; PINE RUN OF VIRGINIA, INC.; DEBTORS MARINA DEVELOPMENT, INC.; TRAFALGAR POWER, INC.; CHRISTINE FALLS OF NEW YORK, INC.; FRANKLIN INDUSTRIAL COMPLEX, INC.; AND PINE RUN OF VIRGINIA, INC.; PLAINTIFFS,
v.
ALGONQUIN POWER CORPORATION, INC.; ALGONQUIN POWER SYSTEMS, INC.; ALGONQUIN POWER FUND (CANADA), INC.; ALGONQUIN POWER INCOME FUND; ALGONQUIN POWER SYSTEMS NEW HAMPSHIRE, INC.; ALGONQUIN POWER (U.S.) HOLDINGS, INC.; AETNA LIFE INSURANCE COMPANY; CIT CREDIT GROUP, INC., FKA NEWCOURT CREDIT GROUP, INC.; CANADIAN INCOME PARTNERS I LIMITED PARTNERSHIP; DEFENDANTS.



The opinion of the court was delivered by: David N. Hurd United States District Judge

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

On November 18, 2010, the United States Court of Appeals for the Second Circuit issued an amended summary order affirming in part and vacating and remanding in part orders dated April 12, 2006, December 19, 2006, and November 6, 2008. Christine Falls Corp. v. Algonquin Power Fund, Inc., 401 Fed. Appx. 584, 587 (2d Cir. 2010) (unpublished summary order). A Mandate was issued on January 21, 2011, and filed in the Northern District of New York on February 1, 2011.

As directed, defendants Algonquin Power Corporation, Inc. ("Algonquin Power"), Algonquin Power Income Fund ("the Fund"), and Algonquin Power Fund (Canada) Inc.

(collectively "Algonquin") filed a brief in support of their motion for summary judgment on their counterclaims. Plaintiffs Trafalgar Power, Inc. ("TPI") and Christine Falls of New York, Inc. ("CFC") (collectively "Trafalgar") filed a brief in opposition. Algonquin filed a reply. The matter was taken on submission without oral argument.

II. BACKGROUND

As the Second Circuit stated, this matter arose "from a complex web of litigation stemming from a loan agreement initially entered into between [Trafalgar and Aetna Life Insurance Company ('Aetna')], and Aetna's subsequent sale of the debt instruments that agreement created-an "A" and a "B" note-to [Algonquin]." Id. at 586. The background of this "complex web of litigation" is set forth in the various decisions pertaining to these consolidated cases as well as the underlying engineering malpractice case and the bankruptcy proceedings. See, e.g., Trafalgar Power, Inc. v. Aetna Life Ins. Co., 396 B.R. 584, 586-87 (N.D.N.Y. 2008) (collecting cases), affirmed in part, vacated & remanded in part, 401 Fed. Appx. 584. Familiarity with the background set forth in the prior decisions is assumed.

The following facts are undisputed. Trafalgar obtained a loan from Aetna Life Insurance Company ("Aetna") to finance its development of hydroelectric power plants in upstate New York. Trafalgar's default on its loan from Aetna led to a restructuring of the debt-with Trafalgar issuing A and B Notes which Aetna purchased for $22.5 million. As a precondition to the debt restructuring, Aetna required that Trafalgar hire a manager for the power plants. Algonquin Power became that manager. State Street Bank ("Security Trustee") was named trustee of the security for the loan, including the income generated by the power plants. Various documents were executed by the parties in conjunction with the restructured debt as will be set forth in more detail in the analysis below. In addition to pledging virtually all of its rights and properties as collateral for the restructured loan, all of the stock of TPI and CFC was pledged as security.*fn1

The loan documents provided, among other things, that the properties would be kept free from liens and the taxes would be paid when due. An Event of Default would arise from violation of any terms which continued for ten days. If an Event of Default existed, the notes could be accelerated. Various other remedies for default were set forth in the loan documents.

Aetna sold the A and B Notes to Algonquin in 1997. The A note has been paid. The Fund is the current holder of the B Note.

Trafalgar filed its corporate income tax returns as part of a Marina filing group. Trafalgar filed tax returns for the 1996 and 1997 tax years that reflected an amount due. However, Trafalgar failed to pay the amounts due. The Internal Revenue Service ("IRS") attempted to collect the overdue taxes and penalties from Trafalgar to no avail. Eventually, on July 1, 1999, the IRS issued a Notice of Intent to Levy on the power projects. Algonquin notified Trafalgar that it was in default due to its failure to pay its corporate income taxes, demanding that the taxes be paid by August 2, 1999. Trafalgar did not pay the taxes. On August 5, 1999, Algonquin notified Trafalgar that an Event of Default existed under the loan documents and that the B Note was being accelerated. Trafalgar filed the complaint in this action on August 9, 1999.

When the IRS issued a Notice of Levy on August 20, 1999, Algonquin directed the Security Trustee to pay the IRS. Algonquin also directed the Security Trustee to take possession of all funds on deposit and remit those funds to Algonquin.

III. SUMMARY JUDGMENT STANDARD

Summary judgment must be granted when the pleadings, depositions, answers to interrogatories, admissions and affidavits show that there is no genuine issue as to any material fact, and that the moving party is entitled to summary judgment as a matter of law. Fed. R. Civ. P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S. Ct. 2505, 2509-10 (1986). The moving party carries the initial burden of demonstrating an absence of a genuine issue of material fact. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2552 (1986). Facts, inferences therefrom, and ambiguities ...


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